Insider Buying On The Rise

06/11/04 09:46:12 AM

by Matt Blackman

Insider selling greatly outstripped buying for the six-month period from September 2003 to February 2004 but it looks like the trend is changing. Could insiders now be telling us that it's time to buy?

Security: NA
Position: N/A

Insider buying improved for the fourth consecutive month, rising 10% from $145 million to $159 million in May according to the most recent Client Advisory from Thomson Financial. In May, corporate insiders sold $4.3 billion worth of their company's shares for a sell/buy ratio value of $20.73.

While Thomson considers any reading over $20 to be bearish, it is a drastic improvement from February's extreme reading of $54.60 that preceded the March-April sell-off. The trend over the last few months has brought the metric into more neutral territory and April's reading was the least bearish signal in a year (see Figure 1).

Figure 1 � Graph showing the insider sell/buy ratio reading for the last 20 months. It is interesting to note that the high that occurred in February preceded the March-April correction. Data provided by Thomson Financial.

In his June 6th client newsletter, insider expert George Muzea confirmed the insiders are neutral, but based on his analysis he believed they were beginning to turn more negative. As a contrarian, he believes that there are too many bulls and that the number of bearish newsletter advisors is dropping, giving him cause for concern. He also sees the current market as one strictly for traders and warns investors to be selective when making new stock purchases.

As an indicator, the sell/buy ratio has proven to be a useful tool for buying and selling the market. A low relative ratio indicates a higher degree of buying and is especially bullish in a bull market or as a bear market is showing signs of reversal. A high relative ratio value has proven to be a good sell indicator in bear markets or as a bull market is getting long in the tooth. Extreme values can warn of a change in trend.

The last time the ratio was this low was in April 2003, just as the most recent bull market was getting under way and while the ratio did not hit a value below $10 this year, from a relative standpoint and based on their activity, insiders are telling us that this is the best time to buy in more than a year.

Suggested Reading:

Blackman, Matt [2004] Insiders Continue to Trade Shares for Dollars, April 13, http://technical.traders.com/tradersonline/display.asp?art=1656

Blackman, Matt [2004] Insiders Aren't Buying the Bull, March 11, http://technical.traders.com/tradersonline/display.asp?art=1577

Muzea, George [2003] The Vital Few vs. The Trivial Many, Literary Press

Seyhun, Nejat H. [2000] "Investment Intelligence from Insider Trading," MIT Press

Thomson Financial [2004], Insider Buying Keeps Insider Signal Neutral, April 5

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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